Bearish Rule of the Majority Signal

At the close of trading 04/22/21 it looked like the US stock market was in the process of a bearish rollover. The next day – bulls strongly disagreed. On the surface the  powerful rally looks sustainable, viewed in a broader context it reveals many bearish signals.

 When only one of the three main US stock indices; S&P 500 (SPX), Dow Jones Industrial Average (DJI), and Nasdaq Composite (IXIC)  make a high/low unaccompanied by the other two main indices, I refer to it as a “Rule of the majority” signal. The truth of the markets direction is with the non-confirming indices.  These signals can occur at major, intermediate, and minor turns.

Since February 2021 there have been  a few “Rule of the majority” bearish signals, none  have held.  Several factors imply the bearish signal made on 04/23/21 could be decisive. 

The hourly SPX chart courtesy of Trading View illustrates intraday momentum.

On 04/23/21 only the SPX made a new all-time high as it pushed marginally above its 04/16/21 peak. The hourly RSI reveals a double bearish divergence from its momentum high recorded on 04/09/21.  This implies at  least a multi-day SPX decline. There are now monthly, weekly, daily, and hourly  SPX- RSI bearish divergences.

The hourly DJI chart shows that this index not only failed to exceed its 04/16/21 all-time high, but it also diverged against the short-term peak made on 04/21/21.

The hourly IXIC chart illustrates its continuing failure to break above its all-time high registered on 02/16/21.

This by itself is a very bearish signal.  From 03/23/20 to 02/16/21 IXIC was the strongest of the three main US stock indices – now it’s the weakest.  IXIC  led the bull market, now perhaps its leading a new bear market.     

The  daily VIX charts illustrates a short-term sentiment signal. 

VIX  made a new post March 2020 low on 04/14/21 on  04/16/21 the closing SPX all-time high – VIX  had a higher bottom, a potential bearish divergence for the SPX.  Recent VIX divergences have not held.  In a  few trading days, we could know if the current bear signal is valid. 

Context of time

The current bearish momentum and sentiment signals are coming on the cusp of a seasonally bearish time.  Two of the most significant SPX peaks within the last eleven years have been 04/26/10 and 05/02/11. The 04/26/10 top is what I’ve labeled  Primary wave “1” of the secular bull market since. The 05/02/11 top was followed by a five- month 21% decline.

Time is running out for the bulls; the kickoff of a new bear phase could be  imminent.  A  move below SPX 4114.82 could open the door to a 11 to 12% micro-crash.  More about this later, depending on market action. 

Published by Mark Rivest

Independent investment advisor, trader, and writer. Articles have appeared on Technical Analysis of Stocks and Commodities , Traders.com Advantage, Futuresmag.com, and Finance Magnates.

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